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Asian Giants Tiptoe Toward Free Trade Deal

"China's intention is to first form a Northeast Asian economic cooperation that excludes the U.S. while Japan can't sit still as South Korea advances to the Chinese market with Korea-China free trade talks," said Heo Yoon, a professor at Sogang University Graduate School of International Studies.

Despite concerns about greater competition in some industries, the South Korean government said a free trade bloc with China and Japan would sharply lower non-tariff barriers and boost its exports to both countries.

The government-funded Korea Institute for International Economic Policy estimates as much as a 0.44 percentage point addition to South Korea's annual growth rate during the five years after the deal took effect.

The auto industry will be a particularly sensitive issue for South Korea where automakers and unions are likely to lobby vociferously against greater Japanese penetration of a market that domestic producers such as Hyundai Motor Co. dominate with 90 percent of sales.

South Korean cars are not popular in Japan while Korean consumers have lately been snapping Japanese vehicles such as Nissan's Cube. South Korea shipped just $33 million worth of vehicles to Japan in 2012 while importing $523 million Japanese cars, according to Korea International Trade Association.

"We are concerned about the free trade deal with Japan," said Kim Tae-nyen, an executive director at Korea Automobile Manufacturers Association. "We don't expect much gain from a deal with China" as Korean automakers already sell locally produced vehicles in China.

Agriculture is also expected to be a sticking point in negotiations as both South Korea and Japan must contend with powerful farmer lobbies worried that cheap Chinese agricultural products will flood domestic markets.

China, meanwhile, is likely to seek lower tariffs on its agricultural products and labor-intensive manufactured goods. But trade experts said Beijing will be reluctant to open its service industries or to allow a freer inflow of foreign capital â¿¿ areas in which South Korea wants to remove barriers.

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